Kotak AMC’s Nilesh Shah Says ‘Stars Are Aligned’ For Real Estate Growth

Kotak Mahindra Asset Management Company’s Nilesh Shah thinks the pieces are falling in place for the real estate sector to become a driver of India’s economic growth.

“We are very bullish on real estate. Work from home has ensured that we are short of one room. Interest rates on housing loans have declined. Many states have given temporary stamp duty concession and most importantly with RERA, consumers can no longer be taken for granted,” the group president and managing director at the fund house told BloombergQuint’s Niraj Shah in an interview. “All these things will result in the expansion of housing and prepone purchases in many cases.”

“Over last 10-12 years the real estate sector’s contribution to GDP has almost come down by half as housing prices became unaffordable, developers were kicking consumers like a football,” Shah said.

Yet, it is not real estate developer stocks that Shah is keen on as most companies have governance issues. “There are very few companies that are worthy of investing,” he said.

“So we are actually trying to play this theme via home improvements where we are investing into cement sector, tiles, paints, furniture fittings, plywoods, electrical fittings, consumer durables,” he said. “These are the segments we believe will give us the ride on the real estate theme and governance will be acceptable to our standards.”

Chemicals: The Other Bet

Besides real estate, Shah said chemical companies are well placed to enjoy a period of growth too. “Most of the chemical companies are expanding capacity and that expanded capacity will get utilised resulting into higher sales and hopefully better margins and higher profitability.”

But at the same time markets have become fairly bullish about discounting these prospects, he said. Like technology companies, chemical companies will need to reinvent themselves. “Chemical companies will have to move from just niche and specialty chemicals to more focussed chemical products. They will have to take care of pollution. They will have to follow safe manufacturing practices at a much a higher level than what they are following today and not all chemical companies will be able to do this transition.”

On Inflation And Equities

According to Shah, any company which has the pricing power will benefit in rising inflation, and any company which does not have pricing power will be squeezed in inflation as their margins will be impacted.

“Generally, in an inflationary environment rising or moderately rising equities tend to outperform over time. We are now starting at valuations which are rich compared to historical average but are much more reasonable compared to alternatives like NFTs, cryptocurrencies and unlisted equities. If sustenance of growth is given then rising inflation is unlikely to impact equities on a permanent basis,” he said.

“On the day when inflation prints are higher there could be some correction but eventually people will believe that growth will give pricing power to the companies and they will be able to pass it on to customers and if growth sustains then that will result into higher profit margin,” he said.

On Commodities

Commodities are an area that’s always difficult to predict, Shah said. “Commodities sector is a cycle. While investing in commodities you must figure where you are in the cycle.”

“When prices rise new capacities start coming into play. Subsequently, people find alternative materials to reduce the demand and over time demand comes down and supply increases and hence prices start falling, and the same cycle happens in a reverse way,” Shah said. “At lower prices capacities shut down, more alternative demand emerges and thus commodities make a bottom.”

Now people can say this a super commodity cycle. “The current momentum does seem to be in favour of higher commodity prices as reflected in global fund managers’ survey of higher inflation. But it will not sustain. At some point of time commodities will make a top.”

“At current level commodities are above their fair value and through this mechanism of more capacities coming into play and alternative materials being used we will see commodity prices softening over a period of time,” Shah said.

Watch the full interview with Kotak AMC’s Nilesh Shah here.